Can Cutting Taxes Speed up Growth?
For most Americans, taxes
are their most visible and least pleasant contact with the federal government.
Naturally, taxes are almost always near the top of the national policy agenda,
and 1996 is no exception. This year, as in many recent years, the focus is
likely to be on what is called the "supply-side" aspect of tax policy. Can tax
reduction speed up the growth of the nation's output and the incomes of the
population by increasing saving, investment, work, education, enterprise,
research, and other factors that determine our capacity to produce? When Bob
Dole is urged to put economic growth at the center of his election campaign, it
is mainly the promise of tax reduction to achieve such effects that people have
in mind. There are, of course, other considerations to be weighed in decisions
about tax policy--fairness, and costs of compliance, for example--but the
growth question dominates current discussion, and we shall mainly concentrate
on that in this week's panel.
Nothing very significant
can be said about taxes in general, except that hardly anyone likes them. The
effects of tax reduction on economic growth will depend on whether the
reduction is an across-the-board cut of income-tax rates, a reduction of
corporate-tax rates, a reduction of the tax on capital gains, a reduction of
the tax on saved income, or one of a long list of other possibilities.
The effects will depend
also on the budgetary context in which the tax cuts are to occur. Would the
proposed cut of some taxes be accompanied by increases of other taxes, and if
so, which? For example, the "flat tax" that some people propose involves both a
reduction of rates and an increase in the income subject to tax because of the
elimination of various deductions. Would a proposed tax cut be accompanied by
expenditure cuts, and if so, which? In our discussion, we shall try to examine
the growth effects of various possible tax programs in their possible budgetary
contexts.
